Getting It Wrong: The Budget Mess

You know Los Angeles is in a fiscal crisis when TV crews show up at the budget hearings. The next few months are likely to be some of the bloodiest in the city's fiscal history. And that's if everything goes well.

As L.A. gropes toward a resolution to this year's budget crisis, the city could learn from its more fiscally conservative brethren. San Jose and Pasadena are known in municipal-finance circles for their monkish fiscal prudence. Though they have seen their revenues plummet and unemployment soar, so far they have survived with their AAA bond ratings intact.

Nine lessons:

(1.) It's much easier to stop yourself from making new hires than it is to make layoffs later.

And yet, in Antonio Villaraigosa's first term as mayor, the city upped its workforce by 10 percent — almost 5,000 positions.

In early 2006, Villaraigosa was warned that his hiring rate was unsustainable. Noting that the payroll swelled by 750 people in the mayor's first six months in office, city finance officers cautioned that the city would have to cease or limit new hiring. But hiring continued unabated until after the economy had badly faltered in early 2008.

In contrast, San Jose held the line on staffing. Its workforce grew by just 3 percent. Closer to home, Pasadena held its staff increase to 6 percent over the same period.

(2.) The unions will respect you more if you don't give them everything.

In late 2007, Los Angeles cut a deal with the Coalition of L.A. City Unions, which gave 25 percent raises to most employees over five years. A city worker making $60,000 in 2007 would be making $75,000 by 2012 for doing the same job. (Contracts for police and water-and-power workers have been, if anything, more lucrative.)

The coalition unions argued that housing costs were skyrocketing and employees couldn't afford to live in the city. In effect, the housing bubble led to a wage bubble for city-government employees. Many thought the deal was too lucrative, and time has proven them right.

San Jose signed a much stingier agreement with its largest union, the Municipal Employees Federation, granting raises of just 7.25 percent over three years.

(3.) Public employees are not A-Rod. You don't need to sign them to a long-term deal.

L.A.'s five-year contract was intended to create stability on the expense ledger. But with revenues cratering, the city is locked into promises it made in more prosperous times. Last October, the coalition agreed to defer its raises by two years. But that will create an even larger obligation in 2014.

By comparison, San Jose signed a three-year deal. Pasadena has contracts ranging from two to four years. As those shorter-term contracts expire, at a time when many private-sector workers have had their salaries frozen or reduced, Pasadena and San Jose will be able to negotiate new deals in keeping with the new reality.

(4.) In the worst downturn since the Depression, don't promise not to lay anyone off.

In exchange for deferring its raises, the Coalition of L.A. City Unions got a no-layoffs clause. The city also agreed to cap furloughs at a modest 3.5 hours every two weeks.

San Jose and Pasadena have pro-labor city councils and aggressive city-employee unions. But their city officials held fast, refusing to promise no layoffs or furloughs.

In Pasadena's case, that came in handy when the Pasadena Management Association refused to give up a scheduled 4 percent raise. City officials made up the difference by imposing eight-hour furloughs on PMA members.

(5.) Maintain good relations with the employees — even if they are jerks.

Nobody remembers Villaraigosa's generosity now that he's been forced to call for thousands of layoffs. Union organizers picketed his Oscar preparty at Getty House, chanting, "Furlough the mayor!" and "Antonio! Shame on you!"

Union leaders complain that Villaraigosa's negotiators have been aloof and unresponsive, and there is deep mistrust on both sides. The result has been bad for the city. After talks with the mayor collapsed last summer, the unions struck a favorable deal with the Los Angeles City Council.

Labor leaders tend to grudgingly respect conservative budgeting, as their members ultimately depend on the fiscal stability of the organization.

(6.) Put somebody in charge, and keep them there.

From mid-2008 to mid-2009, Los Angeles had no permanent city administrative officer. That officer is the city's most important fiscal official, reporting to both the mayor and the council and representing the city in bargaining with the unions.

Union leaders said that the interim administrative officer, Ray Ciranna, did not take the lead in negotiations, and it was not clear who had the authority to make a deal.

"We were enormously frustrated," says Cheryl Parisi, the chair of the Coalition of L.A. City Unions.

As a result, it took 14 months to negotiate an amendment to the coalition's 2007 contract, even as the City Council continued to overspend incoming revenues by $300,000 to $1 million per day.

The new city administrative officer, Miguel Santana, is the fourth in five years.

San Jose has had the same finance director since 2001, and has seen continuity in its other budget positions as well. The unions know whom they are dealing with.

(7.) Find long-term solutions for long-term problems.

Last fall's budget deal approved by the Los Angeles City Council and Villaraigosa was full of onetime solutions, including borrowing from reserves and deferring payments. Santana estimates that only 25 percent of this year's budget solutions were permanent.

Compare that to Pasadena, where 71 percent were permanent. Or to San Jose, where more than 90 percent were permanent.

(8.) You don't have to be a Republican to care about pension reform.

When the stock market crashed in 2008, cities and counties found themselves on the hook for massive pension plans for retiring city workers that must be paid out of city coffers well into the future.

"Most cities and local governments have gotten into contracts that are just unsustainable," says Michael Coleman, a consultant for the League of California Cities and one of the state's top municipal finance experts.

In January, Santana came out with a ballot proposal that would have offered a cheaper pension plan to new city employees.

The city-employee unions quickly shot it down. But at some point the City Council will have to bring it back, if only because going to irked, recession-slammed Los Angeles voters is one of the few credible threats city officials can use as leverage in negotiations.

"Right now the politics of all this do not favor the unions," says Max Neiman, a senior fellow at the Public Policy Institute of California. "There are too many workers in the private sector who are losing benefits."

(9.) Execution is everything.

Napoleon said that, and he took over Europe. It doesn't mean much to have a deficit-reduction plan if it isn't implemented. City Council President Eric Garcetti and others promised they would greatly improve the bottom line by letting 2,400 city workers retire early, but the plan is faltering because City Hall wasn't ready to process the retiree paperwork. Many of the workers are still on the job, which is sharply curtailing the expected savings.

By comparison, Pasadena enacted its own early retirement without delay.

"If there was ever an incentive to get the bureaucracy to move quickly," this would be it, Beck says. "Every day they're here longer than they're supposed to be is costing money."

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